What Is the Technical Progress Function?
The technical progress function (TPF) is an economic measure that seeks to identify the attributable influence of technological progress on total output through the use of a regression model. Technological progress can be an important factor in a country’s economic growth because it helps a country to produce more through the use of better technology on the input side of the production equation. Thus, rather than looking at economic production growth purely in terms of input allocation efficiency, the technical progress function provides a way for measuring technological progress as a contributor to final production overall.
Understanding the Technical Progress Function
The technical progress function is a component of a multifactor regression model used to understand total production and how different variables affect total production. In a basic production regression, the output is explained by the level of efficiency in which basic variables are allocated to production. For example, labor and machinery are two basic variables that influence production.
The technical progress function is an added variable to a production regression analysis. Basically, it is an additional function of the equation that provides insight on technological contributions to production that are not explained by any of the other basic inputs. Generally, as technological progress increases, more production will be attributed to technical progress within the production equation and less to the other variables.
When analyzed in more depth, economic statisticians may seek to break out technological progress into two elements. The two main elements of technological progress are usually:
- Embodied technical progress: Improved technology which is attributed to investments in new equipment. New technical changes made are embodied in the equipment.
- Disembodied technical progress: Improved technology which results in output increases without investing in new equipment.
- The technical progress function is a component of a regression analysis studying how different factors influence total production.
- The technical progress function measures how much economic growth can be attributed to technological progress innovation in a country.
- Technical progress can show up as either embodied in new equipment or disembodied in productivity gains from new innovations unrelated to equipment.
The Solow Residual
Robert Solow received a Nobel Prize for his work on concepts of technical progress function also known as the Solow Residual and total factor productivity (TFP). Solow laid out the growth model used to understand productivity with his model detailing the different functions that influence productivity. Solow’s model includes the functions of capital, labor, and technological progress. It can also be modified for the inclusion of additional variables.
In Solow’s model, the technical progress function is referred to as total factor productivity. Total factor productivity is the reading on how much technological progress is influencing the total output.
When using the model for the years 1909-49 in the United States, Solow found that only one-eighth of the increase in labor productivity in the United States could be attributed to increased capital. America, in other words, became great because of American know-how and innovation.
Total factor productivity can be affected by a variety of influences. While all under the umbrella of technological progress, influences can include tech, cultural factors, and new economic efficiencies. As such, the technical progress function and TFP can also be used to analyze differences in countries’ technological influences and technological progress.